For the sixth consecutive year, Switzerland has topped the Global Innovation Index as the world’s most innovative economy. The small alpine country also has a firm grasp on its crown as the world’s most competitive economy– achieving this status for the eighth-year running. For a country with little to no natural resources, and a 1:5 cow to people ratio- it produces the largest number of patents in the world (892 per million inhabitant or 224 per million cows) and has one of the highest numbers of knowledge-intensive workers. It is the base of pharma giants Roche and Novartis- as well as Nestle and ABB- and home to the worlds largest and well-know banks, as well as numerous corporate venturing funds.
For Switzerland- known for it’s cows, cheese, chocolate, mountains and (sometimes dubious) banking system- you wouldn’t be wrong in thinking that the world’s most innovative economy also has a killer venture capital industry to fund all this technology. After all, there exists a strong correlation in a country’s innovation capacity and VC propensity- multiplied within a competitive framework where technology production (i.e. innovation) stimulates demand (the innovation-first hypothesis) which should very much be a hallmark of Swiss competitiveness.
But it is not so. Despite investment volumes having nearly tripled to $900M in the past 5 years – the Swiss VC industry remains nascent- if not arguably stagnant, compared to its European neighbours and other global innovation leaders. It has grown by an average of 31.2% since 2012- a far lower growth threshold then would be anticipated given the level of innovation activity taking place.
To better illustrate this, let’s compare VC funding growth rates across the same period among other global innovation economies of comparable size and structure:
At first glance, total VC funding in Switzerland seems to be growing at a steady rate.
Unlike Germany, Singapore and Finland, it doesn’t witness significant contractions over this time span (-17% from 2013 to 2014), but nor does it see any sharp spikes. It’s bumbling along steadily, like the neutral country that it is.
But put head to head, the numbers don’t look particularly good for the Swiss. Singapore and Finland- countries of comparable size and innovative output saw an average VC investment volume growth rate of 62.6% and 74.5% respectively- nearly double that of Switzerland’s from Q1 2012 to Q4 2016.
So what would the Swiss VC industry look like if we put it head to head with the nine other most innovative global economies?
To make it fair, let’s first take out the USA- who ranks 5th in the Global Innovation Index and has amassed over $69 billion in VC capital in 2016 alone- nearly 2x the total amount of VC investments disbursed in all the other GII countries across 2012 to 2015. Minus the USA- I’ve ranked the economies by innovation capacity. Whilst Switzerland certainly doesn’t come last in terms of VC investment volume, we can’t exactly pretend that as the world’s most innovative economy, it tops the chart either. On the other hand, it comes as no surprise that the UK invested a total of $3.2 billion in 2016, followed by Germany with $2 billion- both investment amounts that fell from the all-time highs of 2015. The surprising outlier is Sweden- who saw $1.6 billion in VC invested in 2016- up from $1 billion in 2015- followed closely by Singapore with $1.5 billion- a $500M jump from 2015.
So how would Switzerland perform among the other GII countries if we were to rank them in terms of VC investment across the last 5 years?
This is the original ranking according to the GII Index and totaling VC investment from 2012 to 2012.
And this is what the ranking would look like if we ranked the economies by total investment volume:
In this instance, Switzerland comes in the bottom quartile of innovators- ranking 6th.
And what about deal flow?
Unsurprisingly, Switzerland ranks third to last ahead of Ireland and Denmark- with a total of 297 VC deals in the period 2012 to 2016. The USA ranks first with 46,467 deals, followed by the UK (2,661 deals) and Germany (1,431 deals).
Whilst seed rounds in 2016 increased by 115%, they only make up 28% of VC- with early stage funding rounds dominating the landscape (44%). Given the country’s increasingly active CVC funds- late stage capital rounds-off the remaining 27%- a fairly healthy share- although it is important to note that the median deal size for late stage deals are valued at $12M. And finally, it is important to note that across a 5-year period, the most widespread deal size is of $1M.
But what does this data really tell us?
Sure, seed and early-stage capital is available in Switzerland (although I would really have to put it in the seed rather than early-stage bracket)- but clearly, VCs are still dipping their toes and are very risk-adverse in comparison to global standards. Surprising for an innovation-driven economy.
This however, could also be symbiotic of a deeper rooted problem with the startups themselves.
After all, the plethora of VC investments are focused in the biotech and pharma sectors- demonstrating perhaps that software, consumer tech and fintech startups still have some way to go to become globally competitive, despite the rhetoric. It could also be that as with many economies in which startups have become by defacto cool- Switzerland is experiencing a rise in unqualified investors, who do not have the operational expertise to carry a startup to its next stage of growth (more of this another time).
Which leads us to perhaps the most interesting question of all.
What comes first, the innovation or the egg?
This data strongly puts into question the relation between the national innovation capacity of an economy and the supply of venture capital- or perhaps most importantly, startup and entrepreneurial propensity. Switzerland may be the worlds’ most innovative economy- but innovative and entrepreneurial spillovers clearly don’t match the reality of its total factor productivity (TFP). Innovation is clearly not creating a sufficient stock of scalable startups, and as a result, the venture capital industry is concentrated primarily in two segments- angel and seed rounds, and late-stage funding- creating a structural imbalance affecting scalability and capital availability.
From a purely academic standpoint, this creates more questions than it solves- and is worth exploring more in-depth. This could even challenge everything we think we know about the innovation-first hypothesis. Specifically, can Switzerland remain the world’s most innovative and competitive economy if it suffers from such a dearth in startups and venture capital?
Perhaps, solving this conundrum will be my next challenge.
Data: Startupticker.ch, Dealroom.co, Pitchbook, Swedish Private Equity & Venture Capital Association, BVCA, Industriefonden, IVCA, BVKAP, AVPN, SVCA, Preqin, VEC